The Dow Rallies Almost 500 Points
Monday, March 23, 2009SUSIE GHARIB: An explosive rally on Wall Street today, as investors cheered the U.S. Treasury's plan to buy up troubled bank assets. The Dow skyrocketed almost 500 points, closing above the 7,700 level, while the NASDAQ and S&P 500 also posted gains of around 7 percent. Now under the Treasury's so-called public-private investment program, the government will buy up to $1 trillion in toxic securities in a coordinated effort with private investors who will manage the assets. The government hopes this will revive the economy and the financial markets by getting credit flowing again. Darren Gersh reports.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: The president pitched his Treasury's toxic assets plan as an opportunity to put investors to work for taxpayers in a public private partnership.
BARACK OBAMA, PRESIDENT OF THE UNITED STATES: That allows market participants who have every interest in making a profit to accurately price these assets so that the taxpayers share in the upside as well as the downside.
GERSH: The Treasury is planning to team up with hedge funds and other private money managers who will put their own money at risk. The Treasury will chip in up to $100 billion of taxpayer money. The government provides additional financing through the FDIC or Federal Reserve. Once all the details are worked out, analysts expect private investors would be able to put down one dollar and borrow between six to 10 more from the government to invest. Private fund managers will then put a price on those so-called toxic assets, mostly residential and commercial mortgages. Any profits will be split with the government. Treasury counselor Gene Sperling says private managers are best positioned to price toxic assets, because the securities are so hard to understand, the government would be more likely to overpay.
GENE SPERLING, COUNSELOR TO THE SECRETARY OF TREASURY: When you bring private sector investors in a competition to bid for these prices, you've got private sector investors with a bit of leverage and finance trying to purchase these assets and price these assets in the same way that would exist if we had a functioning credit market. So partly what we are trying to do is try to recreate or create temporarily the private sector market for these assets.
GERSH: But economist Adam Posen worries the private money comes at an excessive cost. ADAM POSEN, DEPUTY DIR., PETERSON INSTITUTE FOR INT'L. ECONOMICS: The government is putting up very little money up front, that's true. But they're giving away most of the upside. That means the private sector will get most of the benefits on this stuff as it's sold, as opposed to the taxpayer.
GERSH: Sperling disagrees, arguing that private investors could lose their money if they pay too much for troubled assets and he argues the government financing is not excessive.
SPERLING: We're looking at providing leverage. This may be from one to one, two to one, as high as six to one. But that's the most leverage. Now that is an amount that is not extraordinary or exceptional.
GERSH: Another concern is whether banks will be willing to sell these toxic assets, many of which continue to pay interest. If the banks hold out, analyst Doug Elliot worries taxpayers may be called on to provide more generous financing.
DOUGLAS ELLIOTT, SENIOR FELLOW, BROOKINGS: Banks think these things are worth on average, say $.60 on the dollar. They know they've taken some losses, but they think there's a lot of value. The investors are trying to buy it cheap at say $0.30 on the dollar. The government incentives might move them up to $0.40, but that's still a pretty big difference to bridge.
GERSH: But Sperling says there is good reason for banks to clear these assets off their books.
SPERLING: Now some may decide that they think that if the economy improves, they'll do OK, but we think a lot of banks (ph) know that this uncertainty about what's on their balance sheet is clogging their system. It's making it harder for them to raise capital and therefore harder for them to lend.
GERSH: And then there is the political firestorm over AIG bonuses, which has many private money managers worried about partnering with government. Sperling says it's important to strike a balance.
SPERLING: It is absolutely right and appropriate that when taxpayers see their dollars going to give exceptional assistance to a company that has gotten in trouble, they should know that every single dollar is going to economic recovery and not to pad the expenses or luxury items or salaries or bonuses of executives. So we have to have -- build that public trust. On the other hand, we also have to build the trust of investors and people to come back and take risk again in the United States market. You know, when you have a boom, people take too much risk. When you have a bust, people take too little risk. We want people to take risk in the American economy, in creating jobs and growth here. And so it is important that we also show them that we will be a reliable partner.
GERSH: Sperling says the administration is moving quickly to get this program up and running. But given the slow ramp up of other programs to bolster consumer and business lending, some analysts wonder how many toxic assets will be cleared off the books before the end of the year. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
SUSIE GHARIB: Optimism that the Treasury plan will finally stabilize the financial system pushed shares of major banks higher by 20 percent or more. But despite the rally, there are still questions on Wall Street whether this latest rescue program will pay off for banks, private investors and taxpayers. Scott Gurvey reports.
SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: There is no question the plan was a hit with the stock market with the badly battered financial stocks leading the rally. Action was more subdued among bond traders. Treasuries were little changed. Economist Lakshman Achuthan says that's because it will take a lot more than another plan to bring the recession to an end.
LAKSHMAN ACHUTHAN, MANAGING DIR., ECONOMIC CYCLE RESEARCH INSTITUTE: The markets may be lifting, but it's a stretch to say it's because of the plan, OK. The business cycle is much more important to the future direction of the market than any announcement out of Washington.
GURVEY: There are also questions about how the plan will play on Main Street. Some critics are already complaining that hedge funds stand to gain big profits while taxpayers take most of the risk. Charles Gradante, an advisor to hedge funds, says that is not true.
CHARLES GRADANTE, CO-FOUNDER, HENNESSEE GROUP: The hedge funds are not getting a freebee. They're still downside here. The loan they're getting is a non-recourse loan. So if what they're buying turns out to be a bad investment, the hedge fund will have to pay back the loan and plus lose their initial equity.
GURVEY: The goal of all of these plans is to increase lending to business and consumers. A healthy credit market is essential for economic growth and jobs. But it is also a fact that economic cycles come and go, plan or no plan.
ACUTHAN: If anything, what you've learned from all of these plans that have been announced is that they have very little sway over the economy and over the financial markets. The business cycle will not be dictated to. It will turn when it will turn. And what will happen is when it does turn, whatever plan is in the way will try to take full credit for it.
GURVEY: Two major asset managers endorsed the plan today, Pacific Investment Management or Pimco and Blackrock, which may offer a fund through which individual investors can participate.
GRADANTE: I expect these investments to be very profitable, about 18 percent per year annualized return. And I expect the banks to share in that and in return the banks may get back a decent part of their write down if not all of it. This is a program that could end up to be a win-win for everybody -- a win for taxpayer and a win for hedge funds.
GURVEY: While the stock market may have rallied today, it may take weeks, if not months before we learn how many private investors agree to join this private-public investment group. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.
